that a foreign service provider (or its employee, agent or representative) is physically present in South Africa.

Only recently, however, have requests for information begun to appear from SARS.

The primary focus of the request for information appears to be whether a permanent establishment has been created in South Africa and thus profits attributable to that permanent establishment should have been subject to tax in South Africa. In particular, SARS may be focusing on those jurisdictions where the tax treaty contains specific provisions to preserve source taxing rights (in certain circumstances) with respect to profits from services performed in South Africa. Some of the notable jurisdictions which contain such provisions in the tax treaty with South Africa include, the US, the United Arab Emirates and the UK.

Recent case law development

This line of enquiry from SARS has most likely stemmed from its success in the recent South African tax case of AB LLC / BD Holdings LLC v SARS, Income Tax Case No. 1878. This case involved two corporations incorporated in the US providing consultancy services to a company incorporated in South Africa and the court had to decide whether these foreign entities had a permanent establishment in South Africa.

Article 5(1) of the tax treaty concluded between SA and the US (the Treaty) provides that:

"[f]or the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on."

Further, Article 5(2) of the Treaty provides that the term "permanent establishment" includes especially:

"(k) the furnishing of services, including consultancy services, within a contracting state by an enterprise through which employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or connected project) within that state for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the taxable year concerned."

The court had to interpret these provisions of the Treaty and, in particular, it had to decide whether the foreign service providers would only have a permanent establishment in South Africa if both the requirements in Article 5(1) and (2)(k) of the Treaty had been satisfied (as contended by the foreign service providers) or is it sufficient to merely satisfy the requirements in Article 5(2)(k) of the Treaty (as contended by SARS).

Ultimately, the court came to the conclusion that as soon as an enterprise's activities fall within the ambit of Article 5(2)(k), it becomes liable for taxation in South Africa and therefore there is no need for a further or separate enquiry as to whether the requirements of Article 5(1) have been met.

Interestingly, the court found support for its interpretation and application of the these provisions of the Treaty in the technical explanation of the Treaty, which states that:

"As indicated in the OECD Commentaries ..., a general principle to be observed in determining whether a permanent establishment exists (except with respect to the furnishing of services under subparagraph (k)) is that the place of business must be 'fixed' in the sense that a particular building or physical location is used by the enterprise for the conduct of its business."

Key takeaways

Based on the above case law, and the power to request information that SARS now has at its disposal, we are aware that foreign service providers are starting to receive requests for information from SARS relating to activities that have been conducted in South Africa. When responding to the information request, foreign service providers that render services in South Africa should carefully determine whether a permanent establishment has been created in South Africa, resulting in profits attributable to that permanent establishment becoming subject to income tax in South Africa. This is particularly relevant for those jurisdictions that have provisions similar to Article 5(2)(k) of the Treaty.

Failure to recognize that a taxable presence has been created in South Africa could result in penalties and interest being imposed on the taxes that should have been paid or withheld. It is therefore important for foreign service providers to consider how best to structure their activities in South Africa in order to avoid adverse assessments being raised by SARS.

Although the focus of the request for information appears to relate to possible income tax liabilities in South Africa, foreign service providers should also be mindful that these types of arrangements can have value-added tax and employee tax implications. For example:

if the foreign service provider creates an enterprise contemplated in the Value-Added Tax Act No. 89 of 1991, it would be required to register for VAT and impose VAT at a rate of 14 percent on the consideration received for such services; and

in certain circumstances, the foreign service provider will be required to register as an employer in South Africa resulting in an obligation to withhold employee tax from amounts its employees sent to South Africa to render the services.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.